Recent events in Venezuela

News
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11/17/2017

After the announcements made by the Venezuelan authorities on 2017 November 3rd pertaining to their intention to restructure/refinance their debt, most bond prices dropped sharply.
In an ambiguous way they also reiterated their intention to keep servicing their debt while they pursue discussions with creditors.

The current period was already considered as a critical one given the two substantial maturities due on national oil company PDVSA bonds for close to USD 2bn.

Our expectation was that they would be making these payments. What was unexpected was such an announcement after making the first of these two significant payments.

They did pay a redemption of more than USD 800m on 2017 October 27th and finally paid with some delay another USD 1.1bn redemption due 2017 November 2nd.

Aside from these principal payments some coupons on PDVSA and sovereign bonds (about USD 280m in total) were due to be paid before the end of their grace period on Monday 2017 Nov 12th.

Apparently these have not been paid yet causing some of the rating agencies to declare PDVSA and the sovereign in default. It remains to be seen if these will also be paid with some delay as the authorities have, rightly or wrongly, invoked delays in the payment chain due to US sanctions. A recent official statement mentioned that these payments had been instructed.

Following confirmations of some payments being received and amid reiterations of the government willingness to pay, most Venezuelan bonds have rebounded from the mid 20’s closer to 30.

The market has been pricing with quasi certainty an imminent default, that is why we would not expect a lot more downside from the levels reached last week should a default be confirmed.

In the meantime, a much awaited creditor meeting took place in Caracas on Monday 2017 Nov 12th at the invitation of the government. Marked by low foreign attendance, it turned out to be more of a one way discourse than an exchange. Most of the points made earlier were reiterated, namely the financing difficulties due to US sanctions, the willingness to keep servicing the debt and to negotiate a restructuring/refinancing. Concretely there were no details about the how and when to pursue this exercise, so the next steps still remain a question mark. Which leads us to think that the operation was as much a communication exercise turned toward local audiences as a genuine intent to open the dialogue with creditors. As a matter of fact, government communiques were quick to report that the country had successfully begun the process of refinancing its foreign debt…

Local Political Context

It is important to frame these events within the latest local political developments. Against all odds, (popular support for the regime is less than 20%) the government declared a victory in elections for regional governors a few weeks ago without any massive fraud reported. Apart from a voting system biased in favor of the regime this victory seems mainly attributable to a demobilization of opposition voters after months of demonstrations and many victims which didn’t bring any change. With some political momentum in their hands, Maduro and his close circle might choose to bring forward the 2018 presidential elections and hence try to show that they are addressing the debt payment constraints versus the population needs.

Our Strategy

As we have communicated in the past, a restructuring of Venezuela's external debt was a potential scenario, with or without a prior default, and we were ready to go through that process should it materialize. Obviously US sanctions did bring forward this possible outcome despite higher oil prices this year.

The latest events do not change our long term positive view regarding the potential recovery value of bonds. Given the debt stock, the resources of the country and the very likely policy or regime changes at some stage.

Each sovereign restructuring is unique in its kind and recent examples include Argentina or Ukraine which we have managed in our funds. The case of Venezuela is so special in the sense that it is a unique example of a country so dependent on a single source of income through oil and as such much more exposed to creditors’ actions than in any past cases. This is also what has explained their strong willingness to pay up to this day and their motivation to negotiate with their various creditors.

Flows

More generally in the market, the move already initiated many months ago, whereby some of the more traditional emerging markets investors have been exiting their Venezuelan bond positions, accelerated over the past weeks. Progressively a new category of investors, including specialized and distressed debt funds with a longer term outlook are getting involved. In our opinion, this rotation of the debt stock is an important factor which will impact valuations and volatility over the coming months as had been the case with Argentina from 2013 to 2016.

Disclaimer

2017 November 16th. This document is issued by Edmond de Rothschild Asset Management (France).

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